JOHANNESBURG (miningweekly.com) – The rough diamond market was in a “difficult phase”, with slowing diamond sales, falling prices, continued tight liquidity in cutting centres and weaker economic prospects in China negatively impacting on the short-term outlook for the market, RBC Capital Markets analyst Des Kilalea said on Wednesday.
Despite the second half of the year traditionally providing better results than the first half, owing to upcoming festive holidays and the Indian wedding season, this year would remain “uncertain and unpredictable”.
BMO Capital Market analyst Edward Sterck agreed, telling Mining Weekly Online that the impact of the eurozone crisis on the diamond market was not fully appreciated at the start of 2012.
Numis Securities director of equity research for metals and mining Andy Davidson added that, while it appeared US demand for smaller and cheaper stones slightly rebounded, the rough diamond market deteriorated in recent months, as demand in China and India slowed.
Kilalea pointed out that rough diamond prices had fallen an average of 15% since the start of the year, while Sterck forecast that the prices would remain flat throughout the remainder of the year and experience only 3% growth in 2013.
Davidson further noted a “downgrade” in consensus expectations for the short-term outlook, and expected the prices to remain volatile until there was a substantial pick-up in global consumer confidence.
“There is further downside potential for the market in the short term, if the macro backdrop deteriorates further, but we see the risks there pretty balanced,” he said.
Kilalea stated that despite robust markets, particularly in China, and a relatively stable US market, the growth was forecast to slow.
He pointed to Diamond Trading Company falling short of its predicted $500-million sales – reaching $450-million during the first half of 2012. Further, the trading company allowed sightholders to defer an estimated $100-million in rough diamond purchases during June, which would likely extend into July.
“This is an indication of indigestion in the market, particularly at a time when the market faces the summer holidays. The real question is how sightholders will accommodate the additional rough when the holidays end,” Kilalea said.
He commented that the Indian rupee, which has weakened 15% in the last quarter, had a strong negative impact on the industry in India. The weaker rupee is making diamond imports more expensive and is hurting diamantaires who have US-dollar debts.
But Kilalea said RBC Capital Markets’ medium-term positive view on diamonds remained intact.
“Chinese and Indian demand should recover and the US remains a source of 40% of global diamond jewellery sales. When these recover, we expect to see rough diamond prices start climbing again; perhaps not until early 2013 if the year-end sales season is sufficiently robust to encourage restocking in cutting centres.”
De Beers Group CEO Philippe Mellier recently said that a looming scarcity in rough diamonds would drive the rough prices up and cause the luxury status of diamonds to intensify.
Mellier noted that, as the bulk of the expected 1.4-billion population growth by 2030 would be from emerging economies, diamond growth would see new consumer trends and shifting consumer patterns.
“Average wealth in the emerging economies is poised to provide discretionary spending for luxury goods like diamonds at a time when diamond reserves are becoming increasingly less productive,” he explained.